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FIFO and LIFO accounting
FIFO and LIFO accounting are methods used in managing inventory and financial matters involving the amount of money a company has to have tied up within inventory of produced goods, raw materials, parts, components, or feedstocks. They are used to manage assumptions of costs related to inventory, stock repurchases (if purchased at different prices), and various other accounting purposes. The following equation is useful when determining inventory costing methods:
"FIFO" stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first (but this does not necessarily mean that the exact oldest physical object has been tracked and sold). In other words, the cost associated with the inventory that was purchased first is the cost expensed first.
A company might use the LIFO method for accounting purposes, even if it uses FIFO for inventory management purposes (i.e., for the actual storage, shelving, and sale of its merchandise). For example, a company that sells many perishable goods, such as a supermarket chain, is likely to follow the FIFO method when managing inventory, to ensure that goods with earlier expiration dates are sold before goods with later expiration dates. However, this does not preclude that same company from accounting for its merchandise with the LIFO method.
With FIFO, the cost of inventory reported on the balance sheet represents the cost of the inventory purchased earliest. FIFO most closely mimics the flow of inventory, as businesses are far more likely to sell the oldest inventory first.
Consider this example: Foo Co. had the following inventory at hand, in order of acquisition in November:
If Foo Co. sells 210 units during November, the company would expense the cost associated with the first 100 units at $50 and the remaining 110 units at $55. Under FIFO, the total cost of sales for November would be $11,050. The ending inventory would be calculated the following way:
Thus, the balance sheet would now show the inventory valued at $5250.
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FIFO and LIFO accounting
FIFO and LIFO accounting are methods used in managing inventory and financial matters involving the amount of money a company has to have tied up within inventory of produced goods, raw materials, parts, components, or feedstocks. They are used to manage assumptions of costs related to inventory, stock repurchases (if purchased at different prices), and various other accounting purposes. The following equation is useful when determining inventory costing methods:
"FIFO" stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first (but this does not necessarily mean that the exact oldest physical object has been tracked and sold). In other words, the cost associated with the inventory that was purchased first is the cost expensed first.
A company might use the LIFO method for accounting purposes, even if it uses FIFO for inventory management purposes (i.e., for the actual storage, shelving, and sale of its merchandise). For example, a company that sells many perishable goods, such as a supermarket chain, is likely to follow the FIFO method when managing inventory, to ensure that goods with earlier expiration dates are sold before goods with later expiration dates. However, this does not preclude that same company from accounting for its merchandise with the LIFO method.
With FIFO, the cost of inventory reported on the balance sheet represents the cost of the inventory purchased earliest. FIFO most closely mimics the flow of inventory, as businesses are far more likely to sell the oldest inventory first.
Consider this example: Foo Co. had the following inventory at hand, in order of acquisition in November:
If Foo Co. sells 210 units during November, the company would expense the cost associated with the first 100 units at $50 and the remaining 110 units at $55. Under FIFO, the total cost of sales for November would be $11,050. The ending inventory would be calculated the following way:
Thus, the balance sheet would now show the inventory valued at $5250.